Blockchain Killer Apps - Four Investment Case Studies
BLOCKCHAIN KILLER APPS
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FOUR INVESTMENT CASE STUDIES
As we prepare for the first closing of our latest fund of funds (Fund VII) we are providing further detail of the value creation in our first fund of funds (Fund I).
Many of you have asked for an explanation of how Fund I has outperformed almost all venture funds of a similar nature. Simply put, the rapid acceleration of the first applications of blockchain technology have driven a good number of Fund I's investments into the unicorn category, driving exceptional superior returns for a fund of this vintage.
Becoming a blockchain unicorn (and we are investors in 80+ of them) does not happen without real use cases providing tangible value to tens of millions of consumers who see the benefits of cheaper, faster, easier ways of conducting their financial affairs. Companies with billions of dollars of shareholder value are always focused on providing end user benefits, and this is nowhere more true than in the sector in which we focus.
So we are dedicating this week's newsletter to giving you a clear sense of this dynamic. If you read to the end of this week's newsletter, you will learn:
About our investment thesis and its inevitability.
How the first blockchain use cases are driving enormous end user benefits and becoming 'killer apps'.
Examples of how this translates into massive value capture.
Examples of our portfolio companies which are leading the charge and capturing the value that results.
By the end of the newsletter we hope that you will ask our investor relations team at IR@BlockchainCoinvestors.com to send you details of Fund VII and our upcoming first closing this summer.
First let's reiterate the big picture.
BLOCKCHAIN COINVESTORS INVESTMENT THESIS
We are convinced that our investment thesis is accurate and inevitable. The page we use to convey this simple investment thesis is repeated below.
Needless to say, this is obvious to us. But not apparently to many who continue to doubt the arrival of digital finance, and instead prefer to condemn consumers to slow, expensive, and hard to use ways of conducting their financial affairs - at great loss of value to everyone. It is understandable that business leaders would dig in their heels and protect highly profitable businesses even if they are not great at delivering consumer benefit. It is harder to understand why elected officials would not side with the consumer, who is of course their electorate. Time will tell.
Where the rubber meets the road is when you see the arrival of powerful new solutions that can stand on their own feet against the traditional ways of doing things.
The digitalization of communications accelerated once we understood the benefits of asynchronous digital communications like email, and eventually the synchronous apps like zoom that so many of us rely upon today. The digitalization of all of the world's content accelerated once we understood that downloadable digital press, books, and other content provided such a clear consumer benefit over old, paper based alternatives. Music, film, and games followed quickly and today there is no looking backwards.
Our investment thesis is that all of the world's monies, commodities and assets are about to be digitalized and that all the world's financial infrastructure must be upgraded to enable this transformation.
The next exhibit outlines this visually with a few examples which will be the investment case studies of the rest of this week's newsletter.
Since digital is not possible without appropriate infrastructure, this is where we will begin.
#1: DIGITAL INFRASTRUCTURE
In order to digitize content, we needed to build digital communications and content infrastructure. That seems obvious now, but when Intel, Cisco, and others began shipping servers, routers, and WiFi units, most people did not run out to buy them. Why invest in this new infrastructure if there was no content to move over it? We tend to forget, but in the early 90's most content was still analog and would not travel over new digital rails.
Fortunately, we had a few killer apps that eventually emerged to drive adoption. Email was one. Online websites with easily accessible information like Wikipedia, eBay, and Craigslist were others. Once the early adopters were online using the digital infrastructure, the adoption curves began to steepen. The benefits were simply too tangible and once an 'early adopter' saw what a 'first mover' was doing, they wanted the same. And so on through the late adopters to the laggards. Back then the US led the game with 45% of Americans online in 2001 when most countries were less than 10% online.
In the digitalization of value, we are fortunate that a few disruptive innovative infrastructure companies have been running fast to establish superior infrastructure for their digital ready users. They have names like Anchorage, Fireblocks, Kraken, Opensea, and Uphold although the one that got quickly into the public markets was Coinbase. What exactly does this new breed of digital financial infrastructure companies do? Well they do all the things that the paper and people based predecessors do. They provide transactional accounts, payment rails, asset custody, exchanges and marketplaces, clearing systems, and so on. Only in natively digital versions leveraging the latest technologies including distributed ledger which was created specifically for this purpose.
All of these companies mentioned above are portfolio companies of ours as are a host of others on the following exhibit.
The ones we have mentioned are all now unicorns. Many more will join them since global finance is so much larger than global communications and content.
With digital infrastructure being built out, we can begin to digitize our monies, commodities, and assets. The next investment case study focuses on digital monies.
#2: DIGITAL MONIES
Turning to digital monies, we could talk about central bank digital currencies, but instead we will focus on private sector stablecoins. We have written a lot elsewhere about the rise of stablecoins as a killer app so we won't repeat it here. The following exhibit summarizes the rise to prominence of digital monies that can allow anyone in the world to quickly, cheaply, and securely move digital dollars and other fiat backed tokens to anyone they wish.
Foremost among the private sector stablecoin leaders are Tether and Circle and we are proud to be investors in both. We are also investors in the digital payment players like YellowCard and Ripple who focus on moving digital money with all the benefits this provides to end users.
A host more emerging digital money companies are in our portfolio.
Almost every leading financial center and host country in the world has now passed or is in the process of passing pro innovation stablecoin regulation. Their leaders understand that this is the future and they want to have a piece of it.
#3: DIGITAL COMMODITIES
As monies get digitized, so too do commodities. Sometimes it is hard to see the dividing line between what is money vs a commodity. For much of the world's history our monies were backed by commodities such as gold and silver so the two were to a large extent indivisible. Not so today. Gold and Silver are still commodities but most fiat currencies are not backed by anything other than the promise of our central banks that they won't debase the money. A promise most are not keeping apparently.
When we digitize a commodity like gold, we are actually using a technology called tokenization to digitize the ownership record or certificate so that transactions can be recorded on digital ledgers, and the ownership of the underlying asset can move rapidly and easily wherever digital communications infrastructure exists. Companies like Paxos, where we are investors, have already done this for gold. However, the digital commodity that has the world most excited is Bitcoin.
We already used newsletter Vol 6 Number 3 in March 2024 to talk about Bitcoin Spot ETFs. However, the launch of the Bitcoin Spot ETFs has been the fastest ETF launch of all time, and today most international financial centers are falling in line including recent announcements from the UK, Hong Kong, and Australia.
We are investors in the companies like Bitwise and DCG that lead in this field as well as Hashkey which is one of three Hong Kong based Bitcoin and Ethereum Spot ETF providers. Our venture partners also backed protocols in the early days including mining for Bitcoin, participating in the Ethereum ICO and so on. This early activity has driven our returns handsomely. We thank you.
The investment community has suddenly become very interested in commodity token returns. Institutional investors typically require some years of investment track record before they can engage in an emerging asset class. The table in the exhibit above is one that is now impossible for them to ignore. Bitcoin has at least 11 years of documented track record, and has been by far the highest performing asset in the world during this timeframe, and has been the best performing asset class in 8 of the last 11 years (and the worst performing in 3 of the last 11 years).
Now that is impressive - and volatile.
#4: DIGITAL ASSETS
The insight that got us focused exclusively on blockchain more than ten years ago was that Bitcoin was software, and that meant if we could have one digital money (or commodity) we could have an infinite number of them. Software is infinitely copyable. Which in turn means that all of the world's monies, commodities, and assets were ripe for digitalization now we had a working proof of concept in Bitcoin.
The innovation that enables this is tokenization on distributed ledger technology.
There is great confusion in the media and investment community about what tokenization is, and what crypto tokens represent. Please watch our video ‘Investing in Early Stage Tokens’ if you would like to better understand our investment focus where tokens are concerned. However, to summarize, tokenization is a technology and we can tokenize any asset – when we do this, we begin by digitalizing the ownership record or certificate so we can enable the movement of ownership and value on digital platforms and infrastructure. For each token, the first question any investor should ask is ‘what underlying asset do I own if I buy this token?’ If an investor asks these questions with discipline and rigor, we expect they will not invest in most tokens that are offered to them. First because most tokens will have no value if they have nothing underlying them – they are purely speculative in nature. Secondly, because many tokens represent digitized versions of monies, commodities, or assets which should not be expected to appreciate significantly since the underlying asset is not a ‘value creating’ asset. A dollar is worth a dollar, so a dollar backed stablecoin is worth a dollar, a gold-backed token is worth the gold which backs it, and so on. Blockchain Coinvestors invests in tokens that represent an ownership position in an open source software project which is building software to address critical future needs arising from the movement of the global economy towards a digital economy. This is why we expect the best of them will create value, and potentially appreciate sharply.
We believe each tokenized asset should be priced on its own merits, and as value focused investors, we think token value should represent future value creation expectations. However, the market has not yet matured in this direction, and many tokens appear to be carrying high market capitalizations without demonstrable paths to ongoing value creation, and in aggregate, token valuations seem to go up and down with the value of Bitcoin and its cycle.
Having said all of this, tokenization can't happen without companies that know how to put these powerful innovations to work in real world applications and we are very pleased to be investors in many of the leaders. The following exhibit focuses on one case study - BlackRock BUIDL fund powered by Securitize, because we think this is a world shaking innovation. However, the chart also includes other tokenization leaders that we have invested into.
So now we have provided tangible examples of current use cases which amount to hundreds of millions of end users gaining the benefits of lower cost, faster, easier ways to conduct their financial activities. Not as a pipe dream but today around the world. We have also shown examples of the companies and projects we are invested in that are capturing the value of this transformation and driving the exceptional performance of our funds.
We close with the obvious question.
Is it too late to participate?
IS IT TOO LATE TO PARTICIPATE?
We think not only is it not too late, it is still exceptionally early.
It took a couple of decades for the Internet and the digitalization of communications and content to get to a point where investable companies began to surface - ones bringing the first powerful products and solutions to market that eventually become the first generation of 'killer apps'.
It took another decade or two for innovations like the iPod, iTunes, Facebook, Twitter, AirBnb, Uber, and a host of others to be born. If you had not started your Internet investing in the 1990's you had not missed out on everything. The innovation did not stop, and even today powerful new digital communications and content companies are appearing - just think of the rise of generative AI and how that is building upon the prior wave of early digital content companies.
The same is true of blockchain. We are seeing a full stack of innovation taking place and think we are in round one of a very long, multi-round game.
The answer is to keep investing into the innovation - to dollar cost average if you will.
Fund VII is open to commitments now. It will deliver our value proposition with an investment cycle that will extend primarily through 2025 and 2026 with minimal overlap to our prior funds.
A SINGLE INVESTMENT ACCESSES GLOBAL, DIVERSIFIED EXPOSURE TO LEADING EARLY STAGE.
As a closing note, please contact any of our team at IR@BlockchainCoinvestors.com to express your interest and receive the fund details.
Thank you for reading,
The Blockchain Coinvestors Partners
About Blockchain Coinvestors
Blockchain Coinvestors is the best way to invest in blockchain businesses. Our vision is that digital monies, commodities, and assets are inevitable and all of the world’s financial infrastructure must be upgraded. Our mission is to provide broad coverage of early stage blockchain investments and access to emerging blockchain unicorns. Blockchain Coinvestors’ investment strategies are now in their 10th year and are backed by 400+ investors globally. To date we have invested in 40+ pure play blockchain venture capital funds in the Americas, Asia, and Europe and in a combined portfolio of 1000+ blockchain companies and projects including 80+ blockchain unicorns. Blockchain Coinvestors’ first fund of funds ranks in the top decile amongst all funds in its category on both Pitchbook and Preqin. Headquartered in San Francisco with a presence in London, New York, Grand Cayman, Zug and Zurich, the alternative investment management firm was co-founded by Alison Davis and Matthew Le Merle.
“The best way to invest in blockchain businesses”